AAK AB (publ)
STO:AAK
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AAK AB (publ)
Earnings Call Analysis
Q4-2023 Analysis
AAK AB (publ)
Even amidst ongoing inflationary pressures, the company has managed to keep its capital employed flat. Remarkably, its return on capital employed (ROCE) increased from 14.5% at the end of 2022 to a figure well above the last peak of 15.6% at the end of 2021. The debt-to-EBITDA ratio saw a significant drop from 0.73 in Q3 to 0.49, indicative of a robust balance sheet and financial standing.
The company's decentralized operation has been a double-edged sword, offering closeness to the market and customers while posing challenges in terms of implementing consistent best practices and realizing synergies. To combat this, a drive towards a more aligned organization, while retaining beneficial decentralization, has yielded fruit, as evidenced by the company's strong results in 2022 and 2023. However, leadership acknowledges the journey towards complete alignment isn't over, underlining a culture of continuous improvement.
For 2030, the aspiration is to double operating profit per kilo and outgrow the market volume. The company exceeded its target in 2023, boasting an operating profit per kilo of SEK 1.94 despite a volume decline. Key strategic initiatives include optimizing production across its 20 global sites, managing an effective product portfolio and pricing structure, enhancing procurement processes, and improving cash management which are all elements expected to contribute to sustainable growth and operational efficiency through mid-2025.
In 2023, the company saw improved EBIT per kilo and strong cash flows, driven primarily by increased earnings and operational enhancements. However, this was set against a backdrop of declining volumes, presenting a challenge both realized and anticipated as part of the company's long-term strategic planning.
While no specific guidance for 2024 was provided, the company reaffirmed its long-term aspiration of achieving a 10% EBIT growth in absolute terms over time. It emphasizes the balance between nurturing margins through optimization and strategically capturing volume to bolster long-term aspirations, suggesting a pragmatic yet optimistic future stance.
The executive team addressed the dynamics around cocoa butter pricing. They noted that AAK's alternatives to cocoa butter, which become appealing when cocoa prices rise, do not directly link to the ability to increase their product prices. However, shifts in commodity prices can lead to customer portfolio optimization and present new opportunities for AAK to offer cost-reducing solutions or cater to emerging consumer trends. They expressed the view that while market fluctuations present challenges, they often open up new doors for the company's business.
The fluctuations in working capital due to increasing and then decreasing raw material prices have stabilized. The company expects that moving forward into 2024, the cash flow will be driven primarily by profit levels rather than working capital contributions, indicating a shift towards earnings as the main driver for financial health.
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Welcome to AAK Q4 2023 Report Presentation. [Operator Instructions]Now I will hand the conference over to the speakers, CEO, Johan Westman; and CFO, Tomas Bergendahl. Please go ahead.
Thank you, and welcome. Good morning, everyone. This is the AAK Q4 earnings call. As you heard, together with me, as usual, I have our CFO, Tomas Bergendahl. We will take you through the presentation today. And then, as usual, we are happy to take all your questions afterwards.On Page 2, you will see the agenda for today. And with that, I suggest that we jump right into Page 4 and start our presentation of the Q4. We are really closing the year with strength. It's been a strong year for AAK in total and quarter 4 was no exception to that. Our operating profit increased by 50% at fixed FX rates. This was very much driven by internal process optimization. We have talked about that earlier, but very much in line with what we have been doing and executing throughout the year. Also better portfolio and price management, including a continued focus on selling more of our specialty solutions and that is a focus that will continue with AAK.Our volumes, however, declined 4% year-on-year, but worth mentioning is that we continue to see a sequential improvement, which we also saw in quarter 3. So really good to see that the volume loss to last year quarter 4 is lower than the losses to the previous quarter that we saw during 2023. And if you then go in and look at that sequentially Q2 to Q3 to Q4, we did see improvement in volume.Further to the operating results, we also had a very strong cash flow and the strong cash flow was really driven by the increase in earnings in the quarter. We have a proposed dividend from the Board of Directors, which is at SEK 3.70 per share. This corresponds to an increase of 35% compared to last year. So a nice increase mostly driven by our increased earnings. In summary, a strong quarter, very much in line with the trend for the first 9 months of 2023.With those comments, let's move on to Page 5. Few comments to some events during the quarter. We are very happy and proud that we have now got our targets, our sustainability targets, reduction targets have been approved by the Science Based Target initiative, SBTi. And that marks a milestone, it shows that AAK is really moving ahead. We are also an early adopter with regards to the SBTi targets because we have now, as one of the first companies also secured approval for the flag part of SBTi, which is focusing on forest land and agriculture. So our emission reduction targets have also been approved with regards to Scope 3 under the FLAG directive.Further to this, we have launched a new product, CEBES Choco 15. It has received good recognition at the Food Ingredients Europe. We were in November at this conference, Food Ingredients Europe. We were one of the finalists with regard to in the category for Sensory Innovation award. It's an affordable -- it's targeting affordable indulgence. So in essence, living our purpose making better happen, in this case, making it an opportunity for the consumer to enjoy indulgence at an affordable price.Moving on to Page 6. With regards to our 3 areas, starting with Food Ingredients. Volumes were down 3% year-on-year, but also in this area, we improved volume sequentially. Bakery and Special Nutrition volumes declined, but was somewhat mitigated by a strong performance within Dairy. Coming back to Bakery, our Bakery optimization that we have talked about earlier this year had a negative impact also this quarter. But that was, again, very much according to plan.With regards to our margin, EBIT per kilo increased to SEK 1.96 per kilo, which is a 52% increase versus last year at fixed FX rates. This increase was mainly driven or rather broad-based driven throughout the sub-segments, pretty much all of them improved with the exception of Special Nutrition, which decreased slightly due to lower volumes and lower leverage on that lower volume. Sequentially, the EBIT per kilo declined a little bit compared to a very high SEK 2.15 per kilo in quarter 3.With that, we're moving into Chocolate & Confectionery on Page 7. For the Chocolate & Confectionery Fats, volumes decreased by 3% year-on-year, but grew 3% versus quarter 3, 2023. The performance was a bit mixed within the total Chocolate & Confectionery space. We saw a bit of a decline for solutions to products like chocolate bars and so forth. But on the other hand, compensated by nice growth for solutions where we target ingredients towards spreads and fillings within the Chocolate & Confectionery space.With regards to margin, EBIT per kilo was strong. It increased by 67% at fixed FX. It's very much in line with the rest of 2023, where we have seen a strong performance driven by internal optimization, continued portfolio and price management, improving the way we operate. And this also include our continued focus on selling more of our specialty solutions into various sub-segments of the Chocolate & Confectionery space. To name an example, specialty solutions that we sell to spreads and fillings did very well and had a positive mix effect for the quarter or in the quarter for Chocolate & Confectionery.With that, I move into Technical Products & Feed. Volumes declined by 12%. Really also, when looking at that, it is a high comp in 2022 Q4 and was very high volumes. But again, we grew sequentially in the -- versus the second quarter. So for the second quarter in a row, we grew sequentially. So really from Q2 to Q3 and now from Q3 to Q4. So again, a slightly positive trend versus Q2, Q3. But when comparing to Q4, it was negative 12%. The year-on-year decline was mainly driven by lower sales or lower volumes in the feed business, which again had a strong quarter for 2022.With regards to Technical Products, including solutions where we replace paraffin to candles, it declined slightly, but still on a good level in a historic perspective. EBIT per kilo declined on lower volumes, so lower leverage, also lower margins into our solution for biofuel and slightly lower crush margin also in our crushing of rapeseed.From a rolling perspective, the Q4 results were very much in line with Q2 and Q3, both when looking at volumes and EBIT per kilo.And with that, I hand it over to Tomas for a bit more details on the financials.
Thank you, Johan, and good morning, everyone. Continuing on Slide 9. During Q4, we saw continued positive underlying trend that we've seen in the previous 4 quarters with a strong cash flow driven in Q4 as in Q3, mainly by strong earnings. The quarter generated a positive operating cash flow of SEK 1.4 billion and a free cash flow of SEK 1 billion.And for the full year of '23, we generated operating cash flow of SEK 5.3 million (sic) [ SEK 5.3 billion ]and the free cash flow of SEK 4.1 billion. As it relates to working capital, we had a slight positive overall impact on cash flow in the quarter and we see a positive contribution primarily from accounts receivable, which is driven by a seasonal reduction towards the end of the year. Inventory values grew and had a negative impact in the quarter. This is also driven by seasonality and primarily related to the sourcing of shea kernels.Interest costs paid in the quarter was SEK 59 million and this was a fairly significant decrease compared to the same quarter the year before, mainly driven by reduced debt levels. Tax rate was 19% in the quarter and 23% for the full year. The tax rate in the quarter was -- the reduction was mainly related to the utilization of tax losses carried forward and they are applicable for the full year of 2023. So that's the average to look at.Other noncash items had a positive effect of SEK 241 million, mainly driven by unrealized hedging contracts of raw materials and valuation of pension commitments. And for the full year of '23, the effect from other noncash items was a negative SEK 65 million versus a positive effect SEK 63 million in 2022.Moving on into CapEx. The quarter totaled SEK 325 million. It was slightly below Q4 of the previous year. And this, as before, is related to production improvements, debottlenecking capacity optimization as well as the completion of the 2 bio boilers in Aarhus, Denmark. For the full year of '23, the CapEx spend ended up at SEK 1.2 billion, which is in line with our guidance for the year. For 2024, we expect CapEx related to maintenance, production improvements and capacity optimization to reach roughly the same level, SEK 1.2 billion.And our focus and efforts to manage our cash flow has yielded good results, as you can see. And we remain committed to maintain this momentum in the future through our Cash to Grow program, and I will get back to this later on in the presentation.Next slide, Slide 10, here we see return on capital employed, which in the quarter reached 19.1%, up from 17.2% in Q3 in the same year. This is driven mainly by improved profitability. Capital employed has remained roughly flat in absolute terms despite ongoing inflationary pressure. The ROCE is up from 14.5% at the end of '22 and well above the last peak we saw at 15.6% at the end of 2021.Slide 11, please. The net debt-to-EBITDA ratio was further reduced in the quarter, ending at 0.49, down from 0.73 in Q3 and significantly down, of course, from the peak that we saw mid-2022 at just above 2. And now well below the level before the impact of the increased raw material prices that we saw started off in mid-2020. The improvement primarily driven by strong cash flow, which has then resulted in a reduction in net debt position as well as a strong development of profits. Back to you, Johan.
Thank you, Tomas. Before wrapping up, I would like to review the structural drivers behind our profitability improvement. As I'm sure most of you are aware or already aware, AAK is a decentralized operation or have a decentralized organization. We are very close to the market and our customers. In the decentralization lies also our strength and it is a reason for our success.Nevertheless, the decentralized nature of our operations presents certain challenges, particularly in ensuring consistent implementation of best practices and capitalizing on synergies across our production sites and regions. To tackle this, we have, over the last couple of years, been building an increasingly aligned organization on top of a decentralized structure. And while we have made significant progress, as shown by our results in 2022 and 2023, there is still work to be done on further aligning our organization and our culture.And Tomas, can you give a bit more color to that?
Yes, I will. Thank you. Please turn to Slide 12. As I'm sure most of you remember, back in November of '22 at our CMD, we updated our strategy and set our aspiration for 2030, which, from a financial perspective, is a commitment to double our operating profit per kilo and while outgrowing the underlying market on volumes. And for 2024, we remain committed to this aspiration.2023 was, as you've seen, a very strong year for the company, with an operating profit per kilo at SEK 1.94 and despite a slight decline in volumes, we surpassed our target of having an average operating profit growth of around 10% per year. In addition, and following lower raw material prices, we saw a strengthening of our balance sheet, which in combination with higher earnings then resulted in ROCE that we just showed of 19.1%.As Johan mentioned, we have over the last couple of years been working towards an increasingly aligned organization to strengthen the decentralized structure that has served us so well over time. The strong growth in operating profit per kilo has mainly been driven by a few key strategic initiatives that reflect our commitment to making better happen as one globally aligned and decentralized organization.And going through some of these initiatives, firstly, we continue our efforts to optimize our production process, implementing best practices, debottlenecking across our global footprint of some 20 production sites. The results of this effort is an increase in capacity, improved product quality, increased service levels, general cost savings to mitigate inflation and CO2 reductions.At the end of 2023, we had successfully addressed about 55% to 60% of our installed capacity across our 5 largest sites. And while there is still roughly 40% of installed capacity left to address, this entails mostly medium to smaller units and that means that from an initiative point of view, the majority of the impact has been achieved. The deep dives are expected to continue and be completed by mid-2025.Further significant impact from this effort will be driven by an increase of volume. And building on the learnings from the bakery optimization effort, we also launched an aligned product portfolio and price management structure. This initiative and alignment was based on the revised portfolio strategy presented also at the CMD in '22 and as a key driver and was a key driver for the improvements across both our production and commercial organizations.We primarily focus on product SKU rationalization and product tail management, introducing portfolio-based value price. And while the process of portfolio and price management is an ongoing efforts and will continue to be so, the project itself was successfully concluded at the end of 2023. And the initiative contributed to the operating profit per kilo through improved product mix and also pricing.Looking ahead, we are during 2024 set to apply a similar program structure to align the procurement processes of our non-oil components and inputs. Although we do not anticipate that this will yield an impact of the same magnitude as the 2 other initiatives that I just mentioned, we are prudently optimistic about its potential.We're also looking at how we manage cash across our business. And so far, we have enrolled 4 sites in our Cash to Grow program. And this is a process similar to the production-related deep dives. And the project is expected to be concluded going through all sites by mid-2025, same time line as the deep dives on the production sites.The initiative aims to locally drive cash flow improvements, broaden the financial focus from volume and EBIT to also include working capital and cash flow. And the process includes bringing together local teams with competencies throughout the entire value chain, from sourcing through production and sales as well as finance to get a cross-functional understanding of how working capital and cash will affect our financial results and identify improvement areas to work with locally.The first deep dive took place in India in March of '23. And during 2023, we've also run the deep dives in sites in the U.K., the U.S. and Brazil.Over to you, Johan.
Thank you, Tomas. And to sum it up. We closed out the year, we closed out 2023 with strength. We delivered strong profitability with an improved EBIT per kilo driven by our internal processes, our optimization and better portfolio and price management, very much in line with what's now mentioned by Tomas.Our volumes declined year-on-year, but continued to improve sequentially and we had strong cash flow, mainly driven by our increased earnings. We remain committed to deliver on our 2030 aspiration. We are excited about the internal as well as the external opportunities that we see and that we have. We are well-positioned to continue to grow and expanding our business.And last but not least, we remain prudently optimistic and we are fully committed to living our purpose, which is all about making better happen.That sums up the presentation from our end and we are now happy to take questions from the audience.
[Operator Instructions] The next question comes from Joan Lim from BNP Paribas Exane.
Congratulations on the strong 2023. I've got 2 questions. So just maybe on the '24 outlook, the structural drivers have been very helpful. But you also said previously that given the strength in '23, absolute EBIT growth is unlikely to be at 10% for '24. So how should we think about EBIT development this year? Is it likely to revert back to 2022 levels?And then the second question is on Food Ingredients. So Q4 pricing looks like it's declined significantly by around negative 18%. Can you maybe provide some color on what drove this decline and how we should think about price/mix into '24, please?
Thank you. When we look at 2024 and the developments we've seen from '21 to '22 and '23 -- or '22 to '23, we don't provide guidance for 2024. But we, as we've mentioned, remain committed to our aspiration to generate a 10% EBIT growth in absolute terms over time. So it may, of course, vary over time as well. But we are committed to that aspiration for 2030 and we'll continue our focus to generate improvement on the bottom line year-over-year.
And then the second question was about pricing in Food Ingredients. And as you know, if you refer that question maybe to net sales being down and so forth, keep in mind that we do adjust pricing over time. And we lock in pricing based on where we see raw material cost in the market and we take away those impacts as far as possible with hedging. So our sales price do vary -- sorry, our sales in absolute terms in -- do vary over time.And that's why we do report our earnings and our margin in operating profit per kilo looking at the volume [indiscernible]. And if you see there on Food Ingredients, we see a slight volume decrease, but still a good strength in our operating profit per kilo and our absolute operating profit. So I would say the sales reduction or price reduction that you referred to is very much linked to following the market and the pricing of the raw materials that we have.And maybe further to Tomas' comments on the outlook for 2024, we have reached high levels, right? We have executed very well with the improvement initiatives. I think it's fair to say that we are now really focusing on striking the balance between continued optimization internally as well as looking at pricing in relation to how we get loading, get volume, get the contracts that we fill our plan. So it's really a great opportunities to continue on very high levels and to continue to grow, but also needs to be a bit realistic about how to win volume going forward. So I think that's just where we are.
And further to the Food Ingredients question, as you also see on operating profit per kilo, it actually drops a bit in Q4 versus Q3. But if you look to the history on Page 6 of our quarterly report, you also see that that's a seasonal trend, if you go back and look at the previous 2, 3 years as well.
So in essence, with the right balance act on pricing versus volume and get good leverage of our fixed customer loading plans, there is a good opportunity for us to continue to deliver strong margins and continue to expand our business over time. But again, as a company, we're focused on investing in the right activities that we deliver on our long-term 2030 aspiration.
The next question comes from Simen Aas from DNB Markets.
Congratulations on a very strong end to '23. I have a few questions. So I think I'll start with the first one. So I know you said that you stick with your 2030 ambition and now that you have delivered on this target 2 quarters in a row, just remind us, how should we then think about it? Is it -- this is sort of the new EBIT per kilo level and then you will grow your profits by growing volumes and you will remain at this level? Or how should we think about that? So that's my first.
Yes. Thank you. And as we mentioned before, the aspiration is, at least from a financial point of view, twofolded. One is the operating profit per kilo. The other one is volume to outgrow the market and that we haven't done over the past couple of quarters. So it's, again, back to what Johan said about striking the balance between price margin and the volume and that will continue going forward. And we remain committed to our aspiration, but we also need the volume growth to be able to reach the aspiration in full.
Okay. So -- yes. So that's -- so we should think that EBIT per kilo, then maybe it should come down a bit, while volumes recover? Is that how we should think about that? Or -- because if I remember correctly, you have a pretty much very good visibility on 6 to 9 months going ahead. So just remind us how is the price level on the contracts that you see in 2024? And is it the same level as Q4 or are those prices down?
Yes. Again, we're getting into forward-looking guidance, which we are not doing, but I understand the interest in the question. But if we look at this very operationally, right, there always like you've got to balance yourself. You -- there are contracts that you can actively choose to take or not to take depending on the margin, right? What we're saying is that there is a great opportunity for us to continue to load our plants. We have capacity. We have optimized, as Tomas said before, so there's an opportunity to balance that.If we do that well, that means that maybe with a slightly lower price, we get more volume, but that volume will also lower our fixed costs, meaning that there is an opportunity to continue on a high margin basis. So while I respect that there is a lot of interest, will it be high? Will it be lower or just -- we're going to try our best. We're going to continue to focus on optimizing our structure, getting the contracts to the best possible pricing.But we might give some to win volume, but doing it the right way, that's even an opportunity to continue on high margin or even strengthening that. But again, in relation to our 2030 aspiration, we have delivered more on the margin side over the last couple of years than the volume, which has actually been decreasing. So in terms of focus, it's really about winning in the market.
Okay. Okay. That's clear. And then just one final one here. So the very high cocoa butter prices that we have seen now in tandem with palm oil and rapeseed oil coming down, just can you just give us your thoughts on how this has impacted you? Is it making it easier for you to keep the prices high for your solutions or how should we think about that? Because they have accelerated now into '24 as well. So is this a sticky trend in confectionery side?
It is a great question. It has a few angles to it, right? Obviously, we have solutions that do replace cocoa butter. So in that context, you could argue that everything else equal, it's helping rather than anything else if the competitive solution is more expensive. But on the other hand, this is an open market where we compete with competitors. So it's not a direct link to say, well, if cocoa prices rises, it's easier to just sell our products to a higher price.But of course, there is that gap is, if anything, helping. But there is also the consequence of the consequence, meaning that if we have too high cocoa prices and/or sugar prices and so forth, that would make Chocolate & Confectionery products more expensive on the shelf. And that typically leads to our customers trying to optimize their portfolio.And in many cases, we have solutions that can help reduce the cost of the end product by using more of our components and so forth and/or the consumer actively choosing, which has been a trend over time called Choco bakery, where you have a baked confectionery item coated with chocolate or with a chocolate confectioner filling that on the shelf is lower price or lower cost for the consumer, but still is an indulgence.And again, that's where AAK has very good solution. So when you look at the total mix within Chocolate & Confectionery, some of these single trends, if you will, on, let's say, cocoa prices and so forth, leads to follow-on trends where they -- many of them have a positive impact for AAK. So it's not a straight line between high cocoa prices and ups or downs in our business. It has follow-on ripple effects that are sometimes a challenge, but often also an opportunity.
And that's why you see our spreads performing fairly well now in the quarter as well with increasing prices on cocoa going into sort of a proper brand and chocolate, if you will.
Yes. And that also helps our margin development when we sell more of those advanced solutions for [ EG ] spreads and fillings.
Yes. Because advanced solutions for us doesn't necessarily mean that it's a very high-end product for the end consumer. We do replacements, if you remember.
Okay. That's very helpful. So yes, it's fair to assume that that trend -- there's no change in that trend then in '24, given how the prices have moved. Okay. And then just one final one I have here on the positive working capital effect. Can you just remind us, is this all these effects out now? Or should we expect positive working capital in the second -- or the first half of this year as well?
We consider the working capital effects from the increase and then decreasing raw material price to be worked through the cash flow in 2023. So we don't expect any significant working capital contribution, everything else equal to the cash flow in '24. It's going to be driven by our profit levels.
The next question comes from Oskar Lindstrom from Danske Bank.
Just 3 questions from my side, if I may. Just the first one on the CCF segment and your customers there. I mean, they must really have been hurting from high raw material prices. Was it all mix and that was -- that enabled you to achieve such a strong result, I mean, really throughout the year here in this segment? Or were you also able to sell more expensive products? So perhaps I'm just wondering a little bit more about the details on the very strong results in that segment given the weak market in that segment.
Our visibility into our end customer is sort of limited in terms of what their cost levels and so forth look like for their products, but we do see the raw material price, of course, that have been mentioned before. But to me, it's a couple of things. One is that Q4 actually saw a good pickup again on volume year-over-year if you compare the full year of '23 were actually down 9% versus 22% and only down 2% in Q4.So we saw some pickup there, which, of course, helps with using the free capacity that we have in our plants. The other one that is the structural initiatives that we initiated that we've talked about before and to improve efficiency, looking at the product portfolio, but also pricing and so forth that helps our operating profit per kilo. So it's a mix of the 2, I would say that helps in the quarter.
Right. And my second question is on this topic of volume and available capacity, which you mentioned here. I mean you talked about wanting to drive volume growth during 2024. Is it possible for you to sort of give us a rough figure of how much available capacity do you have in your plants at the moment given the current product mix?
Yes. And as you say, it's all about the product mix, right? And it varies, of course, during the year. But we would say roughly a good estimate would probably be that we have around 15% capacity available in our plants. And again, you don't want to be at 98% to 99% either because that starts to hurt product quality, service levels and so forth. But there is available capacity. And back to your statement there, focusing on volume, our focus is on finding the balance between volume growth and our margin levels. So that's the way forward in '24. But there is available capacity. Yes.
Right. And then my final and third question is on your -- the very strong balance sheet and with quite rapid deleveraging during the past year. Are you saving up money for a big acquisition or investment or are you uncertain about 2024? What are your thoughts about capital allocation going forward?
Yes. Great question. We are certainly not uncertain. I mean, we have been living through a quite significant uncertainty over the last 4 years and look at AAK. I'm so proud of the organization. So I think it's fair to say, we need to be on our toes and anything could happen. But we also have an enormous strength in our decentralized structure that is getting more and more aligned. So with regards to -- no, we are not saving money for being disproportionately uncertain about the future. Definitely not. We are certainly targeting a combination of organic growth and acquisitive cost.So we are looking at continued investments organically for AAK. But we are also actively managing our pipeline of potential acquisitions. There are not that many in our industry. So you need to be there when the time comes right. But I would ideally see that we could have a balance between organic growth and acquisitive growth and using our strong balance sheet for that. So in essence, we are more ready than ever to do with a strong balance sheet and [indiscernible].
Just if I may, a follow-up question on that. I mean, you've now reached 19% ROCE here at the end of -- for 2023. I mean if you're looking to make acquisitions or organic growth investments, are those going to be at that level of return on capital? Or would they by necessity be dilutive because you'd be building a base for future growth? How should we think around your sort of return requirements on capital allocation?
Yes. I mean, obviously, we have seen a good pickup in return on capital driven by lowering the capital base and at the same time, improving our earnings. I mean that's a bit of a math and we're happy with that. And it becomes a bit speculative to say will we by default be dilutive or accretive. And we're going to always look at how we can make investments and acquisitions that will be accretive.But of course, in certain time frames in a bigger greenfield investment, it will be dilutive in the beginning, but eventually will kick in an acquisition, the same thing depending on the characteristics. So I think it becomes a bit speculative, but still we are operating at a high return on capital employed at the moment. So I think it gives opportunity to find a good growth mechanism.
And I would say, I mean, organic growth through CapEx builds and things like that, that would follow the current trend of return on capital, I would say, because that's supporting the continued journey that we're on. And we have very good control over those type of things when we build something in an existing plant and so forth to increase capacity or add new capabilities and things like that.So -- and when it comes to M&A, it's very difficult to say. But historically, we have been buying or making acquisitions at a lower multiple than we are valued at ourselves and then growing the business from a fairly basic, maybe bakery, a little bit dairy into the higher end products that we offer, thereby again, driving the improved profitability of the acquisition over the first 1 to 3 years.
The next question comes from Alex Jones from BofA.
Three as well, if possible. The first is just following up on this pricing discussion. Are your comments of recognition that perhaps you lost some market share as a result of your optimization efforts? Or is this more about you now wanting to sort of take a bit of market share given the volume capacity you've unlocked with your optimization?Then the second question just around the sort of portfolio and price management that you very helpfully talked about. Are you able to give us any more detail on sort of how to think about that from the outside? What did you find at the low end of the portfolio that you've now sort of chopped off? And how are you able to quickly find customers to take the sort of more specialty solutions that you've been shifting into?I don't know if there's any quantification of that sort of rotation of volumes would be very helpful. And then finally, just quickly on the biomass boilers at Aarhus, can you confirm that the sort of net savings number is still SEK 100 million? Or has that changed at all given the volatility in energy prices?
Thank you. Back to pricing. Of course, one could -- did we lose or not lose market share? I might not like the word. But when you make active choices like in the portfolio optimization in the plant, you find the lower end of the tail, low-margin business or even loss-making business that we cut out when we re-price it in such an activity, you can argue you lost market share or you actively walked away from a piece of the market.And then on the other spectrum, when you drive specialty solutions or trying to really maximize your opportunity, of course, there is a risk that you win some, you lose some. I think the fact that we did lose a bit of volume is a combination of active choices or lost deals where we're just saying, we've done really well, but we need to strike that balance. Are we having an opportunity to take market share? Yes, of course, we have.But we have no intention to be very volatile in our behavior. So there is no activity within AAK where we say, go just load, load, load and steal market share, if you will. That's not the game. We're really trying to find and continue a good momentum selling high value-added solutions, protecting good margins, but striking the balance, which is sometimes maybe give a bit on price securing that volume, but not in a way where you just go after any volume. That's not the way we're looking.
And then when it comes to your question on portfolio, it depends on the market, of course, right? But I would say that it's not necessarily so that we close or chop off a complete product segment. We look more to how much that volume is in terms of the overall. And we look at the customers as well.And if we have a strong big customer that buys from most of our segments, we will continue to support them with the full product range. But if we have a customer that either over time or that's just the way it is that they buy the lower-end products at fairly high volumes, that's something that we look at to say do we want to continue with this customer and so forth. So we adjust the volumes in the different segments rather than saying we're shutting something down completely.When you go to [ Marksome ] and the close down there, of course, there we took out volume back to Johan's point as well and stepped out of a portion of the bakery volumes in Europe, we reduced them. We moved what we thought was a good continued future business into [ Van Dyke ] and our [ Hull ], but we left about half of the volume that was in the Marksome facility to begin with.
And that was all in honesty even loss-making business.
Yes. And then if you go to South America, for example, that same business to be very profitable based on the local market conditions. So it's different in different markets. When it comes to the biomass boilers, they are now being ramped up to full capacity. It takes a while, long -- actually a few weeks, understanding their technology on high end, but that's what it is. So we expect them to be fully up and running by the end of March, early April, and the full annualized value is still SEK 100 million, yes.But you have to prorate that for 2024 based on that they're up and running on January 1. But everything else is where it should be on this.
And again, maybe just reminding us that support from saving money, that is also the biggest impact is that we are reducing our CO2 emissions by 90% in the power generation for that plant. So it's a fantastic opportunity to reduce our Scope 1, Scope 2 emissions also under the Science Based Target initiative.
So very happy about the investments.
The next question comes from Alex Sloane from Barclays.
And congrats on the very strong margin performance in '23. I guess maybe starting there, I mean the trend of softer volumes, but very strong margins also appears to be quite common across your listed peers in '23. So I just wonder, is your sense that they've also been optimizing factories? And to what extent do you think customers are maybe looking at this and might want to share in some of that benefit in '24 as perhaps they have to fund higher promotions with retailers to drive their own volumes? That's the first question.The second one, I guess, related, but just going back to the price decline in Food Ingredients. I mean, obviously, the big pullback in raw material prices took place in the middle of '22. So just be helpful in terms of maybe if you can give any color of how much of that big pullback has now been passed back and is reflected in contracts versus how much more this could be a drag on top line in '24?And then just finally, any update on preparations for the EU Deforestation Regulation kicking in end of this year, I think? Are you confident that you and customers will be ready? And any chance in your view that the regulation could be delayed?
Thank you. On your first question, we don't have the transparency into our competitors that way, and we don't comment their activities either. But when you look at us and you also mentioned the -- our customer and our improved margins, I would say, our improved margins is not necessarily just a price hike. We're in a very competitive market. So we don't have any product where we have a monopoly like situation where we can set the price. It's very, very competitive.Our improvements have been done on -- more on the internal arena, in my mind, where we have the efficiency gains, but we also have the portfolio management and don't underestimate the mix change in going from a lower-end product, adding on higher-end product, doesn't mean that the price goes up to the higher-end product customer. It just means our margin goes up, right? So that mix is very powerful in our EBIT per kilo development, I would say.
And maybe adding a bit on that perspective, if you do take on the hat of a customer, look at our absolute -- we measure the EBIT per kilo as a better view on our development. But you've also got to overlay it with the absolute margins because that's how you fund an invest going forward. Our absolute margin is approaching 10%, but not above, right?And that's just a healthy margin. So if I look at this from a customer angle, or if I were to be in their shoes, I would look at AAK as a very healthy, strong partner. And I would like for my partners to be driving innovation going forward, bringing new solutions. And we need to be able to invest. So I'm not shy about that and we don't excuse ourselves for having that kind of margin. If that would have been significantly higher, you could maybe have that perspective. But we don't. We have healthy margins so we sell to healthy customers and I think that's where we are at the moment.
Could you please repeat the second question?
Yes, it was just a kind of a follow-up on the pricing, the big price decline in Food Ingredients and I appreciate that's, as you said, mainly reflective of passing back raw materials. But I mean just looking at the kind of Bloomberg screen on raw materials, the big pullback took place quite a while ago now in the middle of '22. So just really a question on is that a trend we should expect going forward for the next few quarters or are we kind of there in terms of pricing?
No. I mean, we don't see any concerns in that area. You also have to remember the 6- to 9-month lag rolling through in our P&L and balance sheet, right? So you have to move the price points in the market to us by 6 to 9 months as well, right? And then there's more of a good connection in the development in my mind. But no, we don't see any large concerns regarding that.
And then if that's okay by you, then over to your third question, which was about the EU Deforestation, will we be ready? Is there a chance or risk now you see it, that EU will delay it? I think to the last part of it, there's no reason -- there is no information that we have that it would be delayed. There are, of course, discussions around how to implement, how to verify, et cetera, where we, others and government bodies need to align on how to do that.We are actively working on this one. We have a plan and we see a clear way forward. And we will continue to work on the -- in our plan on 3 areas where one is supply development, where we sold the needed verification documentation, et cetera, together with our suppliers.And two, looking at, in some cases, reformulations together with customers to find a solution, an ingredient that is easier or have that prerequisite already there. And the third leg is to look at investments where we could potentially in-source some of the operations, [ decomplexify ] the upstream supply chain to make it easier to comply. And we are well underway in this plan and we will come back to that later in the year to give even more clarity.But with regards to the implementation, there's no news -- no reason to believe it will be delayed at this stage. Would that be the case, then maybe there would be a relief on maybe having a longer time for implementing the verification and the documentation. But again, that would be speculation at this point in time. We are at full speed ahead to be able to deal with this in the best possible way. And I think maybe just to add to that, let's not forget the...
The next question comes from Karri Rinta from Handelsbanken.
Karri, Handelsbanken. Two quick follow-ups and clarifications. Firstly, about Food Ingredients. I think you mentioned that the -- between different categories, most categories had higher EBIT per kilo on a year-on-year basis, except for Special Nutrition. So the reason for Special Nutrition not enjoying the same positive development, is it because those optimization efforts were mostly aimed at other categories or is it because Special Nutrition had such a negative volume development that meant that EBIT per kilo came down? That's my first question.
Yes. Thank you. Great summary there. It's a combination of the 2 for Special Nutrition, lower volume per se has a negative impact. And yes, the broad-based improvement programs have -- were maybe not targeted only on things excluding Special Nutrition, but have a higher impact on some of the other categories in general. I think that's a fair summary.
So you have to remember, Special Nutrition being a well above average margin product for us and still remains that.
And have also some special purpose parts of the operation, meaning that it has dedicated production lines for certain parts of that production as well. So...
Sure. That makes sense. Then the second question is about freight cost developments in 2023. So can you briefly summarize how did your freight costs develop during the year? What's the outlook for 2024? And if you have any meaningful exposure to these recent disruptions?
Yes, very good question. We're trying to match our cost with freight agreements based on our sales volume, which is not the easiest thing in the world, but we try to do that. So to be able to price in any increases that we see on our cost side in the prices to our customers, we have done successfully since 2020 when things started moving on inflationary [ raw maps ] and so forth.We are following the situation very carefully, and some of our -- the vessels that we are using have also rerouted to some extent. It's not impacting our production. But some of the deliveries take a week, 10, 12 days longer than expected and costs are accordingly going up a little bit because of that delay.But going back to show how we managed this in the past, I think we've proven that we can deal with these volatilities, if you will, particularly on the cost side in pricing our products as well. So following the situation very carefully, but confident that we can manage the volatility in prices.
If anything, at the moment, as Tomas said, it's the longer lead time -- it's a longer lead time to get material and with that a bit more, call it, material and capital ownership. But that's it. It's management. But I do hope it goes back, right? It's just sad that we have these kind of disruptions in the global supply chains at the moment.
But right now we don't see any significant impact either to production or to working capital due to this, not at the moment, at least.
There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.
Thank you. And just maybe in addition to the [ EUGR ], we talk about implementation, potential challenges back and forth. I just want to remind us all about the big intent, which is a positive intent to reduce deforestation. We are fully committed in AAK. We have targets on no deforestation on important supply chains. So we're very aligned about reducing the zero deforestations while continue to grow a sustainable business and we're very active on that. So I think that's the number one. We're going to continue on that path and EU is making its effort.Now it's become a bit challenging in how to verify and make sure you can approve that everything is verified deforestation-free. And that's where we're going to have a bit of a challenge and make sure we get there. But again, the intent is really good. We are in full support of that. And our plans are targeting no deforestation. I think that's just an addition to that, and Tomas?
Yes. And just on 2024, I know we received a lot of questions on that and we don't provide guidance. But I would encourage you again to go back to the slide we showed on our optimization, internal focus, improvements, portfolio management and also what we have been stating all through '23 more or less to find the balance between volume and margins and that we have unutilized capacity in our factories due to the deep dives we've done. So we're in a very good position for the euros.
Yes. And also that the volume reduction to last year has been reduced sequentially. And sequentially, we've seen improvement from Q2 to Q3 and Q3 to Q4 in many areas with regards to volume. So that's where we are.All right. With that, I thank you all for listening. Great questions. And with that, thank you so much for the Q4 2023 earnings call.